Associated British Foods 🍞 👚

We are trying something a bit different today, you can listen and watch this post as a video!

ABF is an umbrella which we often forget just how large it is. Part of the FTSE 100 and controlling 20 different subsidiaries, it’s a real British power house. There are lots of reasons why we are talking about ABF right now, but we will be focusing on the big brand (technically a subsidiary) which we all know, and potentially love.

Tolly Boy Rice.

I’m kidding, it’s Primark.

They are in the news today as Primark has shut down all of their stores during the pandemic. They run a slightly unique offering in the sense there is no online store. They are one of the few retailers who are protecting their in store experience, and by and large this has been working successfully for them. By what metric do I say successfully?

£650m in sales per month

It’s a pretty decent amount of money to be bringing in. We do have to look at this through the lens of profitability and margins, along with the rest of ABF being involved, but as a standalone fact it’s an impressive amount from just bricks and mortar stores.

The issue facing Primark is, these stores aren’t open, the employees still need to be paid, and they have rent due.

And finally, as to be expected in these times, they have scrapped their dividends and cut pay.

I suppose you could write in as a shareholder and ask for some free Twinings’ tea, but I wouldn’t get your hopes up.

Now ABF does have a lot of different sides, and during this pandemic we have seen a rise in share price for those in the grocer industry, along with the consumer staples. Interestingly ABF also has a few pharmaceutical firms in it’s bread basket as well.

Generally pharma companies are high risk, cash burn intensive investments, however this seems to be a more consumer driven firm and less of a focus on research and development of new innovations.

All things considered, what does this mean for the current ABF share price?

Not the nicest cuppa you’ve ever had to down. Even the rise of home baking is offset against logistic issues and stores closing down.

News of the dividend dropping, while expected, is still lowing the confidence.

They have made a decent attempt at controlling the narrative to highlight that they are a cash rich firm which can outlast the pandemic, but it’s doing little to brush away the concerns.

While they are very likely to survive, investors are interested in more than simple survival right now. What does this mean for us, the long term investors, though? Is now the time to pickup some Kingsmill and Ryvita?

It seems ABF were not joking around when they said they had the cash to survive.

A very high quality score proves they are a strong business when it comes to managing their cash. With multiple business lines, all with different revenue models and objectives, it’s no wonder the profitability is slightly lower than you would expect. If they split out the highly profitable aspects of the business would they be worth on their own? Very likely, but then that’s less cash for their own business development across the group.

They also have an impressive financial strength rank, in short they have high cash flows compared to their debts. This would make it easier for them to raise debt if required. An ideal card to have during these times! With the dividend cut I expect the quality rank to lower over the next few days as expectations as adjusted.

I was surprised to see the value on the rise. As our rankings are relative to the market, it’s not good enough to be cheap against your share price, you need to be cheap against your share price relative to your peers as well. There generally isn’t much to pick on with the value, everything is average here.

The cash flow from their cash cow Primark has stopped for this month and potentially the next one, but they are controlling the costs which are tied to this. It seems the market is factoring in a decent amount of risk into ABF right now. The future return to “normal” isn’t clear yet.

Finally we have the momentum, the expert analyst views. These have been massively downgraded over the last few days. The next few quarters are not looking promising and there is some contraction expected.

This is not a momentum play right now, which gives credit to the value rank. The market and experts are not confident in the short term.

While they have the money to survive and “throw at the problem”, the shorter term road to recovery is expected to be closer to my baking attempts than anything encouraging.

Not an attractive value purchase, and very weak momentum. Is quality alone enough to make an attractive purchase? Buying now to lock-in the dividends once they return, or wait until the market makes a judgement on the risk?

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Primarks reopening has gone well so far. Strict processes in place for letting people in and out, with everyone required to sanitise their hands has worked well.

Keeping the original promise there hasn’t been any big sales or trying to push out any stock. This is largely due to Primark not paying suppliers and refusing delivery on finished goods, something which may come back to cause them problems.

For now, Primark is looking to reopen more stores and get back to business as usual.